Obama Calls for More Generous Income-Based Repayment in 2010
Obama Calls for More Generous Income-Based Repayment in 2010

The Trump proposal to eliminate Subsidized Stafford loans is another improvement over the current system. As discussed earlier, these loans add complexity to the student aid system by providing students with two sets of loans at the same time. And the interest-free benefits the loans provide are poorly targeted. Students from high-income families can receive them if they attend expensive colleges, and eligibility is based on a student's or parent's earnings when the student enrolls, not when the https://guaranteedinstallmentloans.com/payday-loans-ks/ borrower begins repaying the loan. The Trump proposal solves all of these problems at once. All undergraduates are eligible for one type of loan when they enroll, but the cost of repaying those loans varies with the student's income after he leaves school.

Despite these improvements to the current loan program, there are downsides to the Trump proposal. In some ways, the proposal adds new complexity to the loan program. Establishing two loan forgiveness terms-one for undergraduate and another for graduate students-adds a new set of rules for students to understand and navigate. The Trump proposal also repeats the same mistake that the Obama administration made with its changes to IBR. By shortening the loan forgiveness term five years, borrowers with higher debts and moderate incomes reap the largest increase in benefits. The Trump administration has not provided a clear rationale for providing these borrowers with larger benefits that could be as much as $7,000 (in present value terms).

That said, providing borrowers who have small balances the opportunity for earlier loan forgiveness if they earn low incomes is an improvement over the current IBR program. It address one of the current program's flaws-that graduate students with high loan balances receive the same loan forgiveness terms as undergraduates with low loan balances. But not all undergraduates have low balances and not all graduate students have high balances. The problem with the Trump proposal is that it increases benefits the most for undergraduate borrowers with relatively higher incomes and the largest debt loads. While the Trump proposal is clearly a net gain for undergraduate students and improves how some subsidies are allocated, it goes too far in providing additional loan forgiveness to borrowers who are more able than many to repay their debts.

Background: The loan terms and programs

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Less than 10 percent of students who borrow Subsidized Stafford loans borrow the lifetime maximum of $23,000. 23 Those pursuing shorter-term credentials typically borrow around $7,000 in Subsidized Stafford loans in total and therefore add less than $1,000 in interest to their balances due to the loss of the interest-free benefit, which increases their monthly payments by $11 on a 10-year fixed payment schedule.

Why are the savings so much higher for this borrower than the borrower in the first example who has less debt and a lower income? One might assume it is because the borrower has more debt. But recall that no matter how much more debt the borrower in the first example has, the additional benefit that the Trump proposal provides him is constant. His payments are based on his income under both plans, and because he qualifies for loan forgiveness under both plans, the amount he pays under each remains the same even if he borrows more. In fact, the borrower in this second example receives a larger increase in benefits under the Trump plan because his income is higher.

Net Effects for Graduate Students

The current IBR program is also likely to distort prices for graduate school and decisions students make about how much to borrow. The Trump proposal addresses these issues by removing the perverse incentive graduate students currently have under IBR to borrow more rather than less. Our example showed how a borrower currently would not incur any additional costs by borrowing $90,000 instead of $50,000. The difference would all be forgiven. And as the data show, $50,000 in federal student loans is hardly rare for a graduate student. It is the median balance for someone who completes a graduate degree. Such incentives are also likely to have a significant effect on the graduate education market, indemnifying students for taking on more debt than their future incomes can support and taking pressure off universities to offer only programs that have value in the labor market at prices in line with that value.

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